Downey Financial to reduce dividend payments

Downey Financial Corp. said Friday it will reduce its quarterly dividend to 1 cent after making an already announced payment of 12 cents on May 20.

Downey Financial, which has been hit hard by deterioration in the mortgage market, will pay a dividend of 12 cents per share May 20 to shareholders of record on May 6 before slashing future payments.

The financial services firm at first planned to suspend the dividend all together. But, after a review, it decided to just reduce the dividend in order to allow institutional investors, who are required to buy stock only from dividend-paying companies, to continue to make stock purchases.

Downey Financial was a large originator of option adjustable-rate mortgages, which allowed customers to choose from multiple options when making payments. Those options included paying less than the amount of monthly interest owed on the loan.

Products like option adjustable-rate mortgages have seen rapid increases in delinquencies and defaults in recent months as the housing and mortgage markets have severely weakened. Because of the riskiness of the loans, demand for the product among homebuyers and investors who purchase the loans in the credit markets has all but disappeared.